Zimbabwe Consumer Sector undervalued versus regional peers: The Zimbabwe Consumer Sector appears to be fairly valued compared to historical averages but cheap versus regional peers. The sector is currently trading at a weighted average P/E (+1) of 5.64x versus a weighted average historical P/E of 5.99x and regional peers at an average P/E (+1) of 16.44x. The sector is currently trading at a weighted average EV/EBITDA (+1) of 3.58x versus a weighted average historical EV/EBITDA of 4.14x and regional peers at an average EV/EBITDA (+1) of 7.97x suggesting selective buying opportunities. Despite a challenging economic environment characterized by weakening local currency and high inflation, we believe consumer demand will remain firm supported by the informal sector which makes the bulk of the economy and shows resilience to macroeconomic changes.
Global Overview
With high inflation, rising interest rates, and the ongoing Russia- Ukraine crisis, global GDP growth rate is projected to increase by only 2.3% in 2023 versus pre-pandemic historical average of 3.1%. On the back of high interest rates and a strengthening dollar, emerging markets and developing countries are experiencing debt pressures and fiscal weaknesses which could result in debt distress. Commodity prices are generally coming off, easing pressure on food and fuel prices. Global unemployment is expected to fall below pre-pandemic levels, with a projected rate of 5.3% in 2023.
Zimbabwe Macroeconomic Overview
The Zimbabwean economy continues to face inflation, currency, and exchange rate headwinds. YTD, the exchange rate has depreciated by 647% on the parallel market. Blended month-on-month inflation has jumped from 0.7% in January 2023 to 15.7% in June, suggesting an increasing cost of living. These developments are likely going to weigh down on the projected 3.8% GDP growth forecasted by the government. The IMF forecasts Zimbabwe GDP to grow by 2.5% in 2023 anchored by a good agriculture season and above average commodity prices.
Zimbabwe Consumer Sector Overview
The country continues using a dual currency structure with more than 75% of transactions in the economy being carried out in USD, based on RBZ statistics. On this backdrop, using civil servants as a proxy, salaries have also dollarized albeit still far below 2016 levels. Regardless, USD inflation is now picking up at a faster rate compared to salary adjustments. Given the significant proportion of what is classified as informal sector that is active in maize production, and following a good agriculture season, consumers based in the agro-sector should experience a recovery in earnings from 2022 levels.
IH Recommendations
We expect consumer demand to remain firm supported by a good agriculture season and above average precious metals prices. With majority of the population employed in the informal sector where currency of trade is USD, we are of the view currency headwinds will affect mainly those in the formal sector. Despite an anticipated firm consumer demand, we are skewed towards consumer facing stocks that with an ability to generate revenue in USD, capacity to penetrate the informal sector, ability to adjust prices in line with inflation and exchange rate movements and good management. We lean more towards Delta, Hippo, Dairibord, Simbisa, and Innscor.
